Delta to Buy U.S. Refinery for $150M

Delta Air Lines Inc will buy a Pennsylvania oil refinery from ConocoPhillips for $150 million, the most audacious move yet by an airline trying to save money on fuel costs.

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Delta said the first ever purchase of a refinery by an airline would allow it to cut jet fuel costs -- which reached $12 billion last year -- by $300 million annually. It said production at the refinery along with other agreements to exchange refined products for jet fuel would provide 80 percent of its fuel needs in the United States.

Delta will bring in a management team and outsource the trading operations at the 185,000 barrel per day Trainer, Pa., refinery.

Oil major BP will supply crude oil to be refined at the plant under a three-year agreement. BP and former refinery owner Phillips 66 will get a share of the gasoline, diesel and refined fuel to sell, in exchange for supplying Delta with jet fuel in other locations.

The deal will ease fears that the closure of several major U.S. East Coast refineries would cause a shortfall in gasoline or diesel supplies this summer. The governor of Pennsylvania has scheduled a news conference for Tuesday at Trainer, which has been idled since last September pending a sale.

Delta said it expects the purchase to add to its earnings and expand margins in the first year of operations as it recovers its investment. In addition to the $150 million purchase cost, Delta will also spend $100 million to re-tool the refinery to expand jet fuel output, it said.

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In the weeks leading up to the deal, analysts wondered how an airline could succeed at running a refinery that has produced losses for experienced energy companies. After the announcement, airline and oil industry analysts were still cautious on the purchase.

"Certainly, the East Coast will need refinery capacity to remain operable. But can Delta put together a group to run this refinery profitably," said Mark Routt, senior staff consultant with KBC Advanced Technologies in Houston.

Robert Mann, an airline consultant in Port Washington, New York, added that Delta's statement did not address how it will handle exposure to fluctuations in energy prices or refined product costs or the actual refining process costs.

"It's clearly a very innovative approach, but I think it will be a number of years before we know whether it actually works out," Mann said.

Routt noted that the buy could be aimed at freezing out the competition. Delta Air Lines is the second-largest air carrier, behind industry leader United Continental Holdings. United's Northeast U.S. hub is in Newark, New Jersey, about 90 miles north of the Trainer plant.

Another oil industry analyst, who asked not to be named because his firm represented a competing bid for the plant, said airlines and oil are both capital-intensive industries that require huge outlays of cash. Both incur large cash losses.

"They already make about 15 percent of their slate in jet fuel," he said, adding that he did not expect the refinery to be able to make more than 30,000 bpd of the fuel. Currently, the plant can make about 23,300 bpd.

The refinery would be run by a leadership team headed by Jeffrey Warmann, who last ran Murphy Oil USA's Meraux, Louisiana, refinery.

Atlanta-based Delta said the deal will include pipelines and other assets that will provide access to the delivery network for jet fuel reaching its Northeast operations, including its hubs at New York's LaGuardia and JFK airports.

Delta said its Monroe Energy LLC unit expects to close the purchase in the first half.